Speaker 1: Since you're a subscriber to this Bloomberg podcast, we thought
Speaker 1: you'd be interested in a sponsored podcast called Evolving Money,
Speaker 1: produced by Coinbase and Bloomberg Media Studios. It explains how
Speaker 1: institutional investors are adopting the world's newest asset class crypto.
Speaker 1: Here's a recent episode.
Speaker 2: I think of Bigcoin almost as like a child growing up.
Speaker 2: And you know how kids go through different phases of life.
Speaker 2: They are the phases where they're good students. Then maybe
Speaker 2: they've become teenagers and they need to rebel. Maybe they
Speaker 2: have a punk phase or a goth phase, and we're
Speaker 2: definitely in one of those transitional phases. Now.
Speaker 3: That's oh Meed Malliken, a Wall Street veteran and an academic,
Speaker 3: trying to answer the simple question what is bitcoin? And
Speaker 3: by that I mean is it a currency? Is it
Speaker 3: a commodity? Is a digital gold?
Speaker 2: Or is it a.
Speaker 3: Teen with a questionable haircut? All right, maybe more important
Speaker 3: than asking what it is actually interested in its behavior.
Speaker 3: What is bitcoin's behavioral profile, because that is what will
Speaker 3: inform how it fits into a diversified portfolio. After we
Speaker 3: hear more from Omete, I'm going to bring in Cosmo
Speaker 3: Xiang for you, general partner and portfolio manager with Pana Capital,
Speaker 3: one of the earliest and most established investment firms focused
Speaker 3: exclusively on blockchain and digital assets. I want to talk
Speaker 3: with him about other ways institutional investors can get exposure
Speaker 3: to crypto beyond purchasing bitcoin. This is Evolving Money and
Speaker 3: I'm your host, Angie Lao. This show is co produced
Speaker 3: by Coinbase, one of the largest cryptocurrency platforms in the world,
Speaker 3: in Bloomberg Media Studios. In this series, we are exploring
Speaker 3: how crypto is being adopted by traditional financial institutions as
Speaker 3: the next logical evolution of the monetary system. Let's return
Speaker 3: to Omeid mallikin a little bit more about him. He
Speaker 3: worked on Wall Street for City Venture as their crypto expert,
Speaker 3: and he's been an adjunct assistant professor at Columbia Business
Speaker 3: School for the past seven years, teaching college students about
Speaker 3: crypto and blockchain. He's the best combination of practical experience
Speaker 3: and an academic perspective available. So my first question for
Speaker 3: him is actually two questions. What is bitcoin and for
Speaker 3: an institutional investor, what role does it play in a portfolio?
Speaker 2: So let's start by trying to define what it is,
Speaker 2: and then we can talk about where it might fit in.
Speaker 2: To me, bitcoin is a hard currency that comes with
Speaker 2: its own universal payment system or method of transaction, if
Speaker 2: you will, And that's a very special thing because we've
Speaker 2: always had hard currencies, like gold is a hard currency,
Speaker 2: so gold is notoriously difficult to store and even harder
Speaker 2: to transact. So when you have something that is as
Speaker 2: scarce as bitcoin is, but then you can zap it
Speaker 2: around the world within minutes to anybody that has access
Speaker 2: to the internet, that is a very unique kind of asset.
Speaker 2: Which is why I actually never liked the digital gold
Speaker 2: narrative that some people ascribe to bitcoin.
Speaker 3: So I want to talk to you about that digital
Speaker 3: gold narrative. How did that actually come about, and why
Speaker 3: is it being questioned now.
Speaker 2: To think about bitcoin as digital gold is to double
Speaker 2: click on the scarcity feature. It's a hard currency or
Speaker 2: hard asset. Nobody can print a lot of it. And
Speaker 2: for the same reason that societies throughout history have wanted
Speaker 2: to have some amount of gold, people would then want
Speaker 2: some amount of bitcoin. More recently, a lot of people
Speaker 2: have really questioned the narrative because going back now to
Speaker 2: the last time we made the all time high, which
Speaker 2: might have been last fall. I think the price of
Speaker 2: gold has really surged and the price of bitcoin has
Speaker 2: gone down. So that's where we are now. But like
Speaker 2: I said earlier, I never loved the digital gold analogy
Speaker 2: because the plumbing aspects of bitcoin to me have always
Speaker 2: been just as important as the just it's an asset
Speaker 2: that has a finite supply argument. And just to put
Speaker 2: this in stark terms, let's go back to when Russia
Speaker 2: invaded Ukraine and a lot of people quickly rallied to
Speaker 2: donate a lot of money to the Ukrainian government to
Speaker 2: help with defense, right, and a lot of people actually
Speaker 2: donate a lot of crypto. And let's say that Ukrainian
Speaker 2: government also had a lot of gold, you a warehouse
Speaker 2: somewhere outside of Kiev. But let's say the war had
Speaker 2: gone really badly and Russia had succeeded in toppling the government,
Speaker 2: and the government would have had to flee and go
Speaker 2: rule in exile. How would they have taken their gold
Speaker 2: with them? No, they probably wouldn't have. But with the
Speaker 2: bigcoin and other crypto assets, all the people in charge
Speaker 2: at the time when people donated crypto to them would
Speaker 2: have to do is take a private key. They could
Speaker 2: have even memorized the private key that would now give
Speaker 2: them billions of dollars in purchasing power, or millions or
Speaker 2: however much they had. This is why I think the
Speaker 2: plumbing argument is in many ways far more interesting when
Speaker 2: it comes to monetary insurance than the hard asset argument
Speaker 2: that gold represents.
Speaker 3: It sounds like one of the big differences between gold
Speaker 3: and bitcoin is that while both are scarce resources, it's
Speaker 3: actually much easier to or in transact with bitcoin. So
Speaker 3: you stated that nation states are increasingly interested in expanding
Speaker 3: their assets in bitcoin and cryptocurrency. Why do you think
Speaker 3: that is?
Speaker 2: When we talk about foreign exchange reserves, we talk about
Speaker 2: literally how countries save money for rainy days, and they
Speaker 2: don't need to save really in their own currency because
Speaker 2: they can print their own currency whenever they want. And
Speaker 2: for many decades now, the US dollar has been the
Speaker 2: reserve currency of the world. Something at its peak, like
Speaker 2: I believe well over sixty percent of all foreign exchange
Speaker 2: reserves were dollars. Having to do with the fact that
Speaker 2: every country does a lot of business with America, having
Speaker 2: to do with the fact that people generally trust in
Speaker 2: America's political and legal system, all of these trends are
Speaker 2: now going in the opposite direction. Even in government macro circles.
Speaker 2: It's recognized that we are in a period of de dollarization,
Speaker 2: where for various reasons, tries want to diversify away from
Speaker 2: the dollar, and while many central banks are buying gold
Speaker 2: heart to store, heart to verify, hard to transact. So
Speaker 2: this is where I think almost by the fault. Once
Speaker 2: enough time has passed, more and more countries will say,
Speaker 2: you know, this bitcoin thing is very easy to acquire,
Speaker 2: very easy to transact, and we no longer have to
Speaker 2: take the risk of some other countries' politicians liking us
Speaker 2: doing the right thing, or some other countries central bank
Speaker 2: not printing too much money, So you're.
Speaker 3: No longer tied essentially to somebody else's monetary policy. Indeed,
Speaker 3: that's freedom in and of itself, Yes, it is. The
Speaker 3: academic discussion of what is bitcoin is a fascinating one,
Speaker 3: and the value it has for governments that hold it
Speaker 3: is important. But for institutional investors, the more important questions
Speaker 3: are what does it behave like and what factors drive
Speaker 3: chain and its value.
Speaker 2: The question of how does the asset perform. This is
Speaker 2: actually a homework assignment that I give to my students
Speaker 2: every semester to go download the data and crunch the numbers.
Speaker 2: And it's very interesting because bitcoin has gone through multiple
Speaker 2: phases over the years where it behaves very differently in
Speaker 2: relation to other assets. There was a period early on
Speaker 2: where bitcoin was very much a flight to quality asset,
Speaker 2: where in the event of a macro event or a
Speaker 2: banking crisis like the one in Cyprus, the price of
Speaker 2: bitcoin appreciated materially. Then many people will remember what happened
Speaker 2: during COVID, which is that the price of bitcoin crashed
Speaker 2: along with everything else. And then in the years after COVID,
Speaker 2: the price of bitcoin sword along with everything else. So
Speaker 2: I wouldn't read too much into any one of these cycles,
Speaker 2: and for me personally, this is where I fall back
Speaker 2: on my mental model of this idea of monetary insurance,
Speaker 2: and the correlations have completely broken down now, so bitcoin
Speaker 2: is not correlated with stocks right now, it's not correlated
Speaker 2: with gold, which is unfortunate for the people who really
Speaker 2: brought into the digital gold narrative. But I think this
Speaker 2: is the beginning stages of it. This is purely speculative
Speaker 2: of course, but I think it starting to behave more
Speaker 2: like an asset that people want to own when they
Speaker 2: are problems with more traditional assets.
Speaker 3: That would mean that if everything feels a little crazy,
Speaker 3: you actually do want to kind of have that insurance,
Speaker 3: if you will.
Speaker 2: But over intermedia to longer time horizons, markets can be
Speaker 2: very noisy in the short term, but I do believe
Speaker 2: that years into the future, when people look back on
Speaker 2: the current period that we're living in now, the numbers
Speaker 2: will actually start to show that if you move past
Speaker 2: the most short term time horizons, bigcoin did start to
Speaker 2: act more like an insurance asset. If you think there's
Speaker 2: something to what I said about this idea of a
Speaker 2: it's not digital goal, but it's new financial infrastructure, then now,
Speaker 2: when it's fifty percent cheaper than it was not that
Speaker 2: long ago, that's the time to start accumulating it. As
Speaker 2: to how much one should accumulate, boring academic answer depends
Speaker 2: on your risk profile and what else you hold in
Speaker 2: your portfolio.
Speaker 3: This is a great time to bring in my next guest,
Speaker 3: Cosmo Jing. Cosmo is a general partner and portfolio manager
Speaker 3: at Penta Capital, one of the oldest and largest institutional
Speaker 3: investment firms focused on blockchain and digital assets. I've asked
Speaker 3: them to come on the show because I want to
Speaker 3: explore the impact of digital assets beyond Bitcoin in an
Speaker 3: investor's portfolio and talk about Omed's last words, depends on
Speaker 3: what else you hold in your portfolio, he said, So
Speaker 3: how about it, Cosmo. What else can an institutional investor
Speaker 3: hold other than bitcoin that gives them access to this
Speaker 3: asset class.
Speaker 4: When I think about diversification, I think about it as
Speaker 4: not just about owning more things. It's about owning different
Speaker 4: drivers of return. So you have different things contributing to
Speaker 4: your portfolio.
Speaker 1: You know.
Speaker 4: From that perspective, it's like, why would I want to
Speaker 4: own different drivers of return? Well, either because a they're
Speaker 4: uncorrelated or be they offer something really compelling from a
Speaker 4: growth perspective, And I think cryptoize elements of both. When
Speaker 4: I do think of digital assets, I think about it
Speaker 4: in two large buckets. There's there's bitcoin, and then there's
Speaker 4: everything else, which is blocking the technology that's Ethereum, Salona,
Speaker 4: all these other tokens, and the reality is they both
Speaker 4: have pretty different drivers. Now there's cryptocurrencies and then there's
Speaker 4: protocols that represent unit of value, and so cryptocurrencies are
Speaker 4: kind of different. You need to put on your macro hat,
Speaker 4: and there's not really any fundamentals to talk about fare it,
Speaker 4: just like there aren't fundamentals for goal other than technical flows.
Speaker 3: So what about the adjacent opportunities then, the businesses that
Speaker 3: aren't crypto protocols or tokens but are actually connected to
Speaker 3: the ecosystem. What do you think about those satellite or
Speaker 3: adjacent investments? What do they look like then?
Speaker 4: So, some of the things that we're most excited about,
Speaker 4: and as we get beyond as you say, you know,
Speaker 4: layer one protocols like Bitcoin, Salona, ethereum, are really a
Speaker 4: lot of the applications that are now being built on
Speaker 4: top of these base layers. So things like decentralized finance,
Speaker 4: which is effectively recreating our financial rails except on blockchain rails,
Speaker 4: we find that extremely exciting. As we move beyond DeFi,
Speaker 4: there's a lot of other surface areas that we think
Speaker 4: are really interesting. Explore one area in particular that I'm
Speaker 4: spending a lot of time in that pintera spending a
Speaker 4: lot of time made is all the way that block
Speaker 4: really uniquely enables AI adoption. There are so many interesting
Speaker 4: entrepreneurs that actually sit at that intersection of blockchain and AI,
Speaker 4: because you know, blockchain ani are booth just branches of math.
Speaker 4: I studied math in college. Plenty of my smarter colleagues
Speaker 4: went on to study math and PhD. They all have
Speaker 4: both cryptography experience or blockchain experience and statistic experience or
Speaker 4: AI experience, and so there's already this huge supply of
Speaker 4: entrepreneurs that sit at that intersection and really interesting explore that.
Speaker 4: So my background is also as a long short equity
Speaker 4: investor for most of my career, and so I come
Speaker 4: from a world where I care deeply about fundamental value,
Speaker 4: about revenue, about evadah, about cash flows, and my whole
Speaker 4: raison detro for entering the digital asset space. I started
Speaker 4: to see that more and more protocols actually had those
Speaker 4: characteristics and were able to be underwritten in the same
Speaker 4: exact way that I underwrote equities, and my goal was
Speaker 4: to bring that fundamental financial analysis rigger into the block
Speaker 4: chain space. When you look at blockchain protocols, these can
Speaker 4: be analyzed and should be analyzed in the same exact
Speaker 4: way that you might analyze inequity with any any equity company,
Speaker 4: you might think about, you know, what if they're total
Speaker 4: addressable market, what are the users? How will they monetize
Speaker 4: their users? And then what's the expense structure to get
Speaker 4: to your your earning's power. Similarly, with a blockchain protocol,
Speaker 4: you know you have this, you have this incredible ability
Speaker 4: to use on chain a data to measure a lot
Speaker 4: of those same things. You can see how many users
Speaker 4: any given protocol has. You can see on the blockchain
Speaker 4: it's revenue getting printed second by second, and so you
Speaker 4: can track that revenue and then you can, you know,
Speaker 4: you get a sense of what the operating expense structure
Speaker 4: might be and then how much cash lovelight get produced
Speaker 4: or return to token holders. It happens that most protocols,
Speaker 4: because they are new businesses and new startups, have less
Speaker 4: of a track, ord less history, less data to use.
Speaker 4: But you can dream the dream and if there's that
Speaker 4: same you know, and so there's a wider range of outcomes,
Speaker 4: but you can still do that same sort of analysis.
Speaker 4: So this surprises many our perspective investors when we talk
Speaker 4: to them. But for all of our positions, we have
Speaker 4: three statement models. Right, we build out income statements, We
Speaker 4: build cash flow statements, we bail out balance sheets to
Speaker 4: understand the fundamental growth of this business.
Speaker 3: Cosmo, is there a point we're not having any digital
Speaker 3: asset exposure actually becomes a risk for institutional portfolios.
Speaker 4: I think the answer is very much yes, and that is,
Speaker 4: you know, a driver of some of the interests that
Speaker 4: we're seeing from clients, because if you think about what
Speaker 4: happened last year, not only did it became clear that
Speaker 4: thereas regulatory clarity, that the governments are supportive, that access
Speaker 4: was improving, but also that you know, quietly Coinbase was
Speaker 4: added to the S and P five hundred in the
Speaker 4: second quarter of last year. And what that does is,
Speaker 4: all of a sudden, every single every single professional investor
Speaker 4: now has Blockshain exposure in their benchmark. Right nearly everyone
Speaker 4: in the world uses some version of the SMP five
Speaker 4: hundred or maybe it's MSCI to benchmark their returns. And truly,
Speaker 4: prior to prior to Coinbase being added to the S
Speaker 4: and P five hundred, you had zero blockchain in your index.
Speaker 4: And so if you were, if you're a manager of
Speaker 4: thinking about where you want to be overweight or underway,
Speaker 4: it was never a consideration for you, but all of
Speaker 4: a sudden, starting last year, you are now required to
Speaker 4: think about whether you are overweight, underweight, or equoi to
Speaker 4: asset class. And so that is a major shift and
Speaker 4: a major change. So it does become risky to not
Speaker 4: have access to this assat class now that is actually
Speaker 4: in your benchmark and how you're judged against. And because
Speaker 4: that happens to be outperforming everything else.
Speaker 3: Okay, then is there a point where it's going to
Speaker 3: be too expensive to get into this asset class?
Speaker 4: We get that question a lot, and I think it's
Speaker 4: really important here to have a long term time prize.
Speaker 4: And if you're an investor, the most important thing that
Speaker 4: every marketing department cares about if you run a consumer
Speaker 4: brand is what are the twenty to thirty year olds doing?
Speaker 4: Because you know inevitably that they will get jobs get
Speaker 4: more wealthy over time, and so their portfolio allocation or
Speaker 4: what they spend on what they believe in that will
Speaker 4: those brands will have more value over time because those
Speaker 4: consumers will have more money over time, and they'll replace
Speaker 4: the older coalhorts that age out over time. And you
Speaker 4: know today a lot of fifty to sixty year olds,
Speaker 4: the people with all the wealth have a lot of gold,
Speaker 4: but if you only have the twenty three year olds,
Speaker 4: they all own bitcoin, they don't own gold, And so
Speaker 4: very clear to me over a multi decade time period
Speaker 4: that brand bitcoin is going to win out. And bitcoin
Speaker 4: today is a two trillion dollar market, cab gold is
Speaker 4: something like thirty five trillion, So this for real, you know,
Speaker 4: ten to twenty x opportunity and that is tremendous upside.
Speaker 4: And then from the blockchain technology, I mean I feel
Speaker 4: even more optimistic. It's more excited about the about the
Speaker 4: return potential.
Speaker 3: For institutional investors. Building diversity in a portfolio is all
Speaker 3: about collecting assets that respond to different drivers. Oh Mead
Speaker 3: Malla can seize bitcoin as both a payment system and
Speaker 3: a hard currency. He says its role in a portfolio
Speaker 3: is to serve as insurance against investments that have different
Speaker 3: behavior patterns and protection from monetary debasement. Cosmo Jiang, meanwhile,
Speaker 3: is attracted to the growth potential of digital assets and
Speaker 3: protocols that push investors beyond Bitcoin. What I found interesting
Speaker 3: was the way he explained his approach to evaluating those
Speaker 3: assets and how it mirrors the approach commonly used to
Speaker 3: put a price on traditional equity opportunities. So I'm going
Speaker 3: to give the last word to Cosmo because I want
Speaker 3: him to weigh in on the hottest topic in investing
Speaker 3: right now, artificial intelligence. Are institutional investors over investing in
Speaker 3: AI tech and AI focused companies and what does that
Speaker 3: mean for crypto related investments.
Speaker 4: Your goal as an investor should be trying to capture
Speaker 4: the total universe of potential growth opportunities. And it's pretty
Speaker 4: clear that today a lot of the equity indices over
Speaker 4: index to AI, and you know, that could be for
Speaker 4: a good reason and not. I certainly think AI is
Speaker 4: going to grow tremendously over time, but they probably under
Speaker 4: inext to the next most disruptive technology today, which is blockchain.
Speaker 4: You know, everyone is making this big deal about whether
Speaker 4: I should be able to send in blockchain assets or not.
Speaker 4: You know, blockchain. In the future, all of finance will
Speaker 4: be digital finance, All of finance will include crop blockchain assets.
Speaker 4: Many other businesses, including large AI companies, will be using blockchain,
Speaker 4: and so it'll just become part of our everyday allocation,
Speaker 4: whether that's through investing in blockchain focused companies or other
Speaker 4: companies that happen to use blockchain, across equities, across tokens
Speaker 4: or cross currencies.
Speaker 3: I m amede LAO and This is Evolving Money, a
Speaker 3: co production between Coinbase and Bloomberg Media Studios. Thanks for listening.
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